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Why  Bonds  are 
Safe  Investments 


Published  by 
BOND  DEPARTMENT 


Harris  Trust  &  Savings  Bank 

Organized  as  N.W.  Harris  &  Co.  1882.     Incorporated  1907 
HARRIS     TRUST     BUILDING,     CHICAGO 


Harris,  Forbes  &  Co. 
Neiv  York 


Harris,  Forbes  &  Co. ,  Inc. 
Boston 


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Copyright  1912,  1917,  1920  by 

Harris  Trust  and  Savings  Bank 

CHICAGO 


^^^■^HE  average  person  perhaps  does  not 
J  J  realize  to  what  an  extent  he  is  now 
^^■^  indirectly  investing  in  bonds,  and  en- 
joying the  advantages  which  bonds  have  made 
possible.  The  insurance  company  in  which 
he,  his  family  or  his  property  is  insured  invests 
its  funds  largely  in  bonds.  So  very  likely  to 
a  considerable  degree  does  the  bank  in  which 
he  deposits  his  money.  The  school  where 
he  sends  his  children  has  probably  been 
built  from  the  proceeds  of  a  bond  issue, 
as  have  many  of  the  other  public  improve- 
ments of  his  community,  the  local  electric 
light  plant,  the  waterworks,  the  railroads 
which  developed  the  country  nearby,  the 
trolley  lines  on  which  he  rides,  etc.  Many 
of  the  greatest  conveniences  of  the  present 
day  would  have  been  impossible  if  bonds  had 
not  been  considered  safe  investments  by  a 
very  large  number  of  people.  It  is  the 
purpose  of  this  pamphlet  to  explain  the 
elements  of  safety  which  have  made  this  class 
of  securities  so  popular  with  careful  investors. 


[   5   ] 


HARRIS  TRUST  &  SAVINGS  BANK,  CHICAGO 
Monroe  Street,  Near  La  Salle 


C     6     ] 


Why     Bonds    are     Safe    Investments 


^^fc^HERE  comes  to  almost  every  prosperous  man  a  time 
t  j  when  he  wishes  to  know  the  best  way  of  securing  a  steady 
^^^  income  from  his  accumulated  savings  without  the  burden 
or  responsibility  of  managing  property  in  order  to  gain  this 
income.  The  merchant  may  not  wish  to  put  back  into  his  busi- 
ness all  the  earnings  he  gets  from  it.  The  farmer  realizes  how 
soon  his  broad  acres  may  be  run  down  through  soil-robbing  when 
he  rents  his  property  "on  shares. "  When  such  a  problem  arises 
the  thoughtful  man  casts  about  him  for  information  on  which 
to  act. 

One  of  the  first  things  he  learns,  if  he  studies  the  situation 
carefully,  is  that  there  is  a  wide  difference  between  an  income 
derived  from  one's  own  business  ability,  such  as  the  profit 
secured  from  running  a  store,  factory,  jobbing  house  or  farm,  and 
the  income  which  is  the  result  of  money  "working"  by  itself.  In 
the  first  case,  one  must  keep  up  his  business  responsibilities;  in 
the  other,  once  he  has  selected  a  safe  investment,  practically  all 
he  has  to  do  is  to  collect  his  income  from  time  to  time  as  it  falls 
due.  There  is  no  depreciation  of  land,  buildings,  machinery  or 
the  like;  no  insurance  payments  to  worry  about;  no  crop  failures 
to  consider. 

Investment  Advice 

If  one  wishes  to  put  surplus  money  away  and  to  receive  a 
steady  income  from  it  without  bother  and  worry,  the  most 
important  thing  to  consider  is  how  to  go  about  it  to  select 
something  which,  once  purchased,  will  turn  out  to  be  a  safe 
investment. 

Clearly,  safety  is  the  first  consideration.  This  means  only 
one  thing:  the  sum  of  money  you  invest  must  be  returned  to  you 
or  your  heirs  in  full  at  some  definite  time.  Every  safeguard  to 
this  end  must  be  provided.     You  should  not  be  satisfied  with  the 


[   7   ] 


Harris      Trust     and     Savings      Bank 


<P 


mere  ownership  of  property  without  definite  assurance  of  the 
return  of  the  money  you  put  into  it.  This  is  just  as  true  whether 
the  property  be  in  the  form  of  a  partnership  in  a  going  business, 
the  stocks  of  a  corporation,  or  pieces  of  real  estate.  No  one  is 
obliged  to  take  these  off  your  hands,  and  if  you  are  to  get  back 
the  money  you  have  invested  you  must  sell  in  whatever  market 
you  can  find  for  the  property.  On  the  other  hand,  if  you  lend 
your  money,  it  must  be  returned  to  you  at  a  certain  time,  and 
you  do  not  have  to  sell  property  in  an  uncertain  market  to  regain 
what  you  have  invested.  From  this  you  can  see  that  a  safe 
investment  is  not  merely  property,  but  it  is  a  secured  promise  to 
pay — an  obligation  to  return,  for  value  received,  a  certain  sum 
of  money  on  a  given  date. 

But  the  desirability  of  an  investment  does  not  end  with  the 
obligation  to  return  the  principal;  the  sum  must  provide  beyond 
question  a  satisfactory  income.  This  should  not  be  as  uncertain 
as  the  profits  from  the  individual  ownership,  let  us  say,  of  real 
estate,  for  lands  or  buildings  may  be  idle  and  the  income  cease. 
Neither  should  it  depend  upon  the  rise  and  fall  of  the  profits  of  a 
business,  as  when  dividends  on  stocks  of  corporations  increase  or 
stop  entirely  as  the  company  enjoys  prosperous  times,  or  suffers 
reverses.  Such  methods  of  employing  capital  are  of  their  very 
nature  business  risks,  requiring  skill  of  management  to  assure  an 
income.  If  you  wish  to  free  yourself  from  these  risks  and  re- 
sponsibilities, provision  must  be  made  to  have  the  income  of  a 
safe  investment  fair,  steady  and  as  certain  as  human  foresight 
can  make  it. 


® 


Security 

But  a  bond  is  even  more  than  this.  In  the  old  common  law 
sense  of  the  word,  a  bond  signified  an  obligation  to  perform  an 
act,  and  in  the  event  of  failure  to  do  so,  there  was  provision  for 
the  forfeit  of  something  to  compensate  for  damages  sustained. 


[     8     ] 


W^hy     Bonds     are     Safe     Investments 


This  is  true  of  investment  bonds,  which  are  secured  by  a  lien 
against  property  which  would  be  forfeited  in  case  the  obliga- 
tion were  not  met.  In  the  case  of  Government  and  Municipal 
bonds  there  is  no  direct  lien  against  property,  but  there  is  a  lien 
against  taxes  levied  upon  property  and,  as  everyone  knows,  taxes 
must  be  paid  or  else  property  forfeited.  Therefore,  all  invest- 
ment bonds  are  secured  either  directly  or  indirectly  by  a  lien 
against  property.  The  return  of  the  principal  sum  at  a  definite 
date  and  the  regular  payment  of  interest  at  a  fixed  rate  are  set 
forth  in  special  agreements  in  the  bond,  which  also  usually 
provide  penalties  in  case  the  agreements  are  not  carried  out. 


Marketability 


Finally,  an  ideal  investment  must  have  the  qualities  of  con- 
vertibility. That  is,  it  should  be  of  such  character  and  in  such 
form  as  to  permit  of  sale  for  cash  if  this  should  be  desired, 
or  of  its  use  as  collateral  for  a  loan  at  a  bank  in  case  the  investor 
needs  to  borrow  money.  In  this  great  age  of  public  improve- 
ments and  general  business  on  a  huge  scale  requiring  large 
sums  of  capital,  money  is  borrowed  for  such  projects  in  large 
amounts.  At  the  same  time,  in  order  that  these  loans  may  be 
available  to  all  owners  of  money,  large  or  small,  a  big  loan,  or 
bond  issue,  is  divided  into  many  smaller  parts,  and  one  of  these 
parts  is  a  bond.  For  example:  an  issue  for  one  million  dollars 
may  be  divided  into  one  thousand  parts,  or  bonds,  of  31,000  de- 
nomination each;  or  perhaps  2,000  bonds  of  3500  each,  or  even 
10,000  bonds  of  3100  each.  In  other  words,  such  a  bond  issue 
may  be  compared  to  a  huge  farm  mortgage,  divided  into  many 
parts,  each  part  like  a  separate  mortgage.  Therefore,  a  bond  is 
a  negotiable  instrument,  so  prepared  as  to  be  readily  recognized 
at  banks  and  in  the  market  places  of  the  world  as  a  part  of  a 
loan  of  real  worth  and  definitely  secured  as  to  repayment  of 
principal  with  interest. 


[   9   ] 


Harris      Tr  u  s  t     and     Savings      Bank 


Appearance 

On  pages  12  and  13  we  have  reproduced  a  specimen  copy 
of  a  bond.  From  this  picture  it  will  be  seen  that  the  bond  is  a 
specially  prepared  document,  usually  engraved  or  lithographed 
on  very  fine  paper,  so  that  it  will  not  wear  out  with  years  of 
handling.  The  wording  on  the  bond  states  just  what  the  bond  is ; 
when  the  promise  to  pay  will  fall  due;  where  the  principal  is 
payable,  and  in  what  kind  of  money;  when,  where  and  how  the 
interest  is  to  be  paid,  and  how  much  it  is;  and  what  the  provision 
is  for  prompt  payment  of  principal  and  interest. 

Coupons 

In  the  reproduction  of  a  bond  on  page  13  will  be  noticed  a 
number  of  small  ticket-like  divisions  or  coupons.  The  reading 
matter  on  such  coupons  states  that  so  many  dollars  of  interest 
on  the  bond  for  a  year  or  half-year  or  quarter-year  will  be  due  on 
a  certain  date  and  will  be  payable  at  the  place  indicated.  When 
these  coupons  fall  due,  the  owner  of  the  bond  clips  them  off  and 
presents  them  for  payment.  If  he  is  some  distance  from  the 
place  of  payment  he  may  collect  his  interest  by  mail,  or,  more 
easily,  he  may  deposit  his  coupons  at  any  bank  for  collection. 

Registered  Bonds 

Some  bonds  do  not  have  coupons;  these  are  known  as  "fully 
registered  bonds. "  Instead  of  presenting  coupons  for  collection, 
the  owner  of  such  bonds  receives  his  interest  by  check  through 
the  mail  without  action  on  his  part.  To  "register"  a  bond  the 
owner  has  it  sent  to  the  agent  of  the  maker  of  the  bond  so  that  he 
may  be  recorded  as  the  owner  of  the  bond.  Bonds  may  be  reg- 
istered in  two  ways.  In  the  case  of  a  "fully  registered"  bond 
both  principal  and  interest  are  payable  only  to  the  person  who 


[  io  ] 


IV h  y     Bonds     are     Safe     Investments 


has  been  recorded  as  its  owner.  Thus,  a  "fully  registered"  bond 
may  be  said  to  be  "registered  as  to  principal  and  interest." 
When,  however,  a  bond  is  "registered  as  to  principal  only,"  it 
carries  interest  coupons,  which  are  collected  in  the  usual  way.  A 
bond,  the  principal  of  which  is  registered,  must  be  transferred  on 
the  books  of  the  maker's  agent  each  time  it  is  sold;  that  is,  only 
the  registered  owner  can  sell  it  legally.  Coupon  bonds  can  be 
sold  without  this  formality.  The  chief  value  of  the  registered 
form  of  bond  is  that  it  safeguards  the  bondholder  against  loss  in 
case  the  bond  is  mislaid  or  stolen.  If  the  purchaser  expects  to  sell 
his  bond  on  short  notice,  it  is  preferable  to  buy  the  coupon  form 
instead  of  the  registered  form,  for  the  coupon  bond  can  be  de- 
livered at  once  without  the  delay  sometimes  necessary  in  trans- 
ferring the  registered  bond. 

Maturity 

We  have  said  that  on  the  face  of  the  bond  is  printed  the 
date  it  will  fall  due,  or  be  paid  off.  This  date  is  its  maturity. 
Many  bonds  are  paid  off  at  a  stated  date,  without  any  privilege 
of  payment  at  an  earlier  time.  Such  bonds  may  run  for  any 
period  specified,  but  it  is  customary  for  them  to  run  thfee,  five, 
ten,  twenty,  thirty,  forty,  fifty  years  or  even  longer.  Some 
bonds,  however,  may  be  paid  off  at  the  option  of  the  borrowers 
at  an  earlier  date,  frequently  at  a  premium.  Thus  a  31000 
bond  with  a  maturity  of  twenty  years  from  date  of  issue  may, 
by  such  provision,  be  retired  by  the  borrower  in  ten  years  at 
105  or  by  the  payment  of  31050  instead  of  31000  to  the  holder. 

Interest 

The  rate  of  interest  to  be  paid  is  stated  in  the  bond,  and  also 
the  time  when  the  interest  will  fall  due,  whether  every  three 
months,  every  six  months,  or  yearly.     This  rate  is  paid  until  the 


[  ii  ] 


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[    12    ] 


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{    13    ] 


Harris      Trust     and     Savings      Bank 


bond  matures  or  is  redeemed  under  its  optional  provision.  The 
usual  interest  payment  is  twice  a  year;  thus  the  owner  of  a  bond 
bearing  six  per  cent  interest  payable  semi-annually  January  1 
and  July  1  will  receive  on  each  of  those  dates  a  half-year's  in- 
terest on  his  bond;  if  the  denomination  of  the  bond  is  #1,000, 
that  is  #1,000  face  value,  he  will  receive  #30  on  January  1  and 
#30  on  July  1. 

Since  interest  is  always  accruing  on  bonds  at  the  rate  named 
therein,  one  must  consider,  when  bonds  are  sold,  the  amount  of 
interest  that  has  been  earned  between  the  time  the  last  previous 
coupon  matured  and  the  date  the  bonds  are  to  change  hands. 
Naturally  the  seller  of  the  bonds  is  entitled  to  the  interest 
the  bonds  have  earned  while  they  were  his;  hence  he  charges  the 
buyer  with  this  "accrued  interest."  From  this  practice  arises 
the  term  "and  interest,"  or  "accrued  interest',  in  connection  with 
the  market  price  of  a  bond.  The  price  of  a  bond,  therefore,  is 
usually  quoted  thus:  "97^"  and  interest."  This  means  that  a 
#100  bond  is  to  be  sold  at  #97.50  plus  whatever  interest  has 
been  earned  since  the  last  coupon  was  paid;  or  that  a  #1,000 
bond  will  be  sold  at  #975  and  interest.  To  cite  an  example: 
Suppose  interest  on  a  certain  #1,000  bond  is  payable  January  1 
and  July  1  at  the  rate  of  five  per  cent  yearly,  and  the  bond  is 
to  be  sold  October  1 ;  it  is  evident  that  a  coupon  calling  for 
#25  was  paid  July  1,  but  that  the  next  coupon  to  be  paid  Jan- 
uary 1  has  earned  half  the  #25  to  be  paid  next  January.  In 
other  words,  #12.50  has  accrued  to  the  date  of  sale.  Therefore, 
if  the  bond  is  to  be  sold  at  97}4  and  interest,  the  price  will  be 
#975  plus  the  #12.50  accrued  interest,  or  #987.50.  Thus  the 
seller  gets  his  accrued  interest  on  his  bond  when  he  sells  it,  and 
the  buyer  gets  back  the  interest  thus  advanced  when  the  coupon 
matures  in  January. 

Price 

The  price  of  a  bond  like  the  price  of  grain,  provisions  or  any 
other  commodity,  depends  upon  market  conditions  existing  at 


[    H 


Why     Bonds     are     Safe     Investments 


the  time.  Naturally,  other  things  being  equal,  a  six  per>cent 
bond  will  bring  a  higher  price  than  a  five  per  cent  bond,  because 
the  income  of  the  six  per  cent  bond  is  greater.  But  the  security 
behind  the  five  per  cent  bond  may  be  so  much  greater  than,  that 
behind  the  six  per  cent  bond  that  the  five  per  cent  bond,  will 
be  more  attractive,  therefore  in  greater  demand  and  commanding 
a  higher  market  price.  Also  the  question  whether  the  interest 
from  the  bond  is  subject  to  the  income  tax,  affects  its  price. 
For  example,  municipal  bonds  being  free  from  federal  income 
taxes  (See  page  19)  command  a  higher  price  for  this  reason  as 
well  as  for  their  high  degree  of  security.  Besides  these  con- 
siderations there  is  the  general  question  of  the  prevailing  price 
of  money  in  the  markets  of  the  world;  in  other  words,  general 
interest  rates.  Thus,  these  influences  taken  together  may  cause 
a  bond  to  sell  for  more  or  less  than  its  face  value,  or  for  exactly 
that  amount  (par).  That  is,  one  kind  of  a  31,000  bond  may  be 
so  attractive  that  it  may  sell  for  31,080;  or  as  the  price  would  be 
quoted  in  percentage,  at  108  (at  eight  per  cent  premium,  or 
eight  per  cent  above  par).  Another  31,000  bond  may  be,  for 
entirely  legitimate  reasons,  less  in  demand  and  sell  for  3900; 
or  in  market  terms,  at  90  (at  ten  per  cent  discount,  or  ten  per 
cent  below  par). 

Income 

There  may  be  a  marked  difference  between  the  rate  of  in- 
terest paid  and  the  rate  of  income  on  the  investment  in  a  bond. 
The  rate  of  interest  on  any  given  bond  is  the  same,  but  the 
rate  of  income  which  the  investor  receives  from  his  investment 
in  a  bond  varies  according  to  the  price  paid,  the  interest  rate 
specified  and  the  length  of  time  the  bond  has  to  run. 

When  a  bond  is  sold  below  its  face,  or  par,  value,  in  other 
words  at  a  discount,  the  rate  of  income  is  naturally  more  than 
the  fixed  rate  of  interest  named  in  the  bond,  because  the  interest 


[  is  ] 


[    16    ] 


Why     Bonds    are     Safe     Investments 


is  figured  on  the  face  value  and  the  investor  has  not  paid  the 
full  face  value  for  the  bond.  On  the  contrary,  when  a  bond  is 
sold  at  a  premium,  or  above  its  face  value,  the  rate  of  income 
derived  from  the  investment  naturally  is  less  than  the  rate  of 
interest  named  in  the  bond.  While  the  interest  on  a  31,000 
six  per  cent  bond  is  always  360  a  year,  the  actual  percentage 
of  yield  or  income  to  the  investor  is  more  than  six  per  cent  or 
less  than  six  per  cent  according  as  the  price  paid  for  the  bond 
is  at  a  discount  or  a  premium. 

If  a  bond  is  bought  at  a  price  below  its  face  value,  say  97 
for  a  6%  bond  of  3100  face  value,  maturing  in  three  years,  not 
only  does  the  investor  receive  slightly  more  than  6%,  because 
36.00  amounts  to  a  little  more  than  six  per  cent  on  397,  but 
also  at  the  end  of  three  years,  when  the  bond  is  paid  at  100, 
he  gains  the  difference  between  397  and  3100,  and  this  amount 
(33.00)  is  included  in  the  "yield"  on  the  investment.  It  must 
of  course  be  spread  out  over  the  period  of  the  investment  and 
in  this  example  it  makes  the  yield  over  7%  (approximately 
7.12%). 

Standard  tables  of  figures  have  been  prepared  by  mathe- 
maticians and  actuaries  for  use  in  such  transactions  which  show 
what  is  earned  on  a  given  bond  at  a  given  price.  These  tables 
take  into  consideration  the  principle  of  compound  interest  and 
involve  rather  complicated  mathematical  computations,  but 
the  example  given  in  the  preceding  paragraph  serves  to  illustrate 
the  general  principle. 

Foreign  Government  Bonds 

The  bonds  of  leading  foreign  governments  have  always 
been  considered  among  the  world's  soundest  securities,  and  until 
the  Great  War  began  in  1914  commanded  unusually  high  prices, 
yielding  correspondingly  low  rates  of  interest.     Before   1914 


[    17    ] 


Harris      Trust     and     Savings      Bank 


there  were  comparatively  few  of  these  bonds  sold  in  the  United 
States,  which  until  that  time  had  been  a  borrowing  nation  rather 
than  a  lending  nation.  Today  the  United  States  is  one  of  the 
greatest  lending,  or  creditor,  nations  and  hundreds  of  millions 
of  dollars  of  foreign  government  securities  are  held  in  this 
country. 

The  rate  of  interest  of  these  foreign  loans  now  is  much 
more  than  government  bonds  usually  pay.  Some  of  the  recent 
issues  pay  as  high  as  8  per  cent. 

U.  S.  Government  Bonds 

The  interest  rate  of  these  bonds  ranges  from  2  to  4^ 
per  cent.  They  are  issued  to  supply  the  government  with  funds 
(usually  for  extraordinary  needs)  and  are  payable,  principal 
and  interest,  from  the  revenues  of  the  government.  They  are 
secured  by  the  simple  credit  of  the  country  and  are  free  from 
state  and  local  taxes  and  with  certain  restrictions  and  exceptions, 
from  federal  income  taxes.  During  the  war  over  321,000,000,000 
of  Liberty  Bonds  and  Victory  Notes  were  issued,  which  com- 
prise the  bulk  of  the  United  States  Government  obligations 
outstanding.  United  States  Government  bonds  are  recog- 
nized as  the  safest  investment  in  the  world. 

Municipal  Bonds 

Broadly  speaking,  these  are  the  promises-to-pay  of  states, 
counties,  towns,  cities,  school,  road  and  drainage  districts  and 
such  other  corporate  bodies  as  have  the  power  of  general  taxa- 
tion to  provide  for  the  payment  of  the  principal  and  interest  of 
the  bonds.  Such  bonds  are  issued  for  the  purpose  of  payment 
for  some  public  work  or  improvement,  such  as  school  or  other 
buildings,  fire  departments,  drainage  and  water  systems,  roads, 


[    18    ] 


Why     Bonds    are     Safe     Investments 


parks,  sewers,  etc.  Back  of  municipal  bonds  as  security  is  the 
credit  of  the  community  and  its  power  to  levy  taxes  on  all  the 
taxable  property  within  the  municipality  to  meet  the  bond 
obligations.  The  record  of  such  bonds  is  so  uniformly  good 
that  they  are  generally  considered  as  "next  to  government 
bonds."  The  names  of  municipal  bonds  may  vary  according 
to  the  purpose  for  which  the  bonds  are  issued.  Thus  a  county 
may  issue  "court  house  five  per  cent  bonds,"  which  would  in- 
dicate that  the  bonds  were  issued  for  the  purpose  of  constructing 
a  court  house  and  that  they  bear  five  per  cent  interest. 

There  are  several  other  classes  of  bonds  issued  by  bodies 
more  or  less  governmental  in  character  which  have  been  termed 
municipal  bonds  but  which  may  not  have  the  chief  essentials 
of  municipal  bonds.  Special  assessment  bonds  and  many 
irrigation  bonds  are  of  this  character.  Such  bonds  are  paid 
from  special  assessments  or  special  taxes  and  not  from  general 
taxes  on  all  property.  Bonds  of  such  character  must  be  in- 
vestigated with  unusual  care,  and  it  is  highly  important  that 
the  investor  be  assured  of  the  integrity  of  the  house  offering 
such  issues  payable  from  special  taxes.  .  The  test  for  a  municipal 
bond  is  to  ascertain  whether  or  not  it  is  primarily  payable  from 
taxes  on  all  the  taxable  property  within  the  municipality  whose 
name  it  bears,  and  has  been  issued  in  full  accordance  with  the 
laws  of  the  state  in  which  the  municipality  is  located. 

Under  the  rulings  of  the  Treasury  Department  the  income 
from  municipal  bonds  issued  in  the  United  States  is  exempt 
from  all  Federal  Income  Taxes  (both  the  normal  taxes  and  the 
surtaxes).  For  this  reason  these  bonds  are  particularly  adapted 
to  investors  with  large  incomes. 

Corporation  Bonds 

This  class  of  bonds  is  issued  by  railroad,  public  service  and 
other  corporations  for  the  purpose  of  procuring  funds  for  con- 


[  19  ] 


Harris      Trust     and      Savings      Bank 


structing  or  extending  the  company's  S3^stem  or  plant.  Such 
bonds  are  secured  by  the  credit  and  earnings  of  the  corporation, 
in  addition,  generally,  to  a  mortgage  on  the  property  of  the 
company. 

In  considering  corporation  bonds  as  investments,  a  sharp 
distinction  should  be  made  between  bonds  and  stocks.  Corpora- 
tion bonds  evidence  a  loan  to  a  company,  whereas  stocks  are  cer- 
tificates of  ownership  of  the  company  itself.  In  the  case  of 
bonds  the  interest  rate  is  fixed  and  does  not  vary,  whereas  with 
stocks  there  may  or  may  not  be  an  income,  depending  on  whether 
the  company's  business  is  profitable  or  not;  and  when  stocks  do 
pay  dividends,  both  the  income  and  the  price  of  stocks  may 
fluctuate  widely.  Inasmuch  as  stocks  are  not  promises-to-pay 
and  often  are  bought  to  sell  at  a  profit,  they  are  frequently 
subject  to  great  speculation.  On  the  other  hand,  properly 
secured  bonds  are  purchased  by  investors  because  of  their  time- 
tried  safety  of  principal  and  steady  income. 

Railroad  Bonds  form  a  somewhat  distinct  class  by  them- 
selves among  corporation  bonds,  because  most  of  the  better 
known  systems  have  been  in  business  so  long  that  their  future 
earning  capacity,  on  which  money  for  the  payment  of  bonds 
depends,  can  be  determined  accurately,  and  the  safety  of  the 
bonds,  therefore,  easily  established.  These  usually  are  issued 
to  provide  funds  for  building,  extensions  or  equipment,  and  are 
secured  in  one  way  or  another  by  the  revenues  and  properties 
of  the  road  issuing  them. 

Public  Service  Corporation  Bonds  are  chiefly  character- 
ized by  the  fact  that  they  are  issued  by  corporations  which  render 
some  much  needed  service  to  a  community,  and  operate  under  a 
special  grant  or  franchise  from  a  city,  town,  state  or  similar  divi- 
sion of  government.  Water,  gas,  electric  light,  heat,  power, 
street  railway  and  telephone  service  are  among  such  public 
utilities.     Bonds  issued  by  companies  of  this  character  in  well 


[  20  ] 


Why     Bonds     are     Safe     Investments 


established  communities  have  an  exceptionally  good  record  for 
safety,  for  even  in  periods  of  general  business  depression,  the 
company's  earnings  maintain  a  high  level  because  the  service 
supplied  is  necessary  to  the  community  served. 

Industrial  Corporation  Bonds  issued  by  corporations 
with  long  records  of  successful  operation,  supplying  public 
necessities  such  as  food  products,  steel,  electric  light  equipment, 
dynamos,  telephone  instruments,  locomotives,  freight  cars, 
boilers  and  similar  products,  are  among  the  safest  investments 
when  properly  protected.  The  kinds  of  industries  involved 
are  so  varied  in  character  that  it  would  take  too  long  to  enter 
a  technical  discussion  of  the  safeguards  to  seek  in  this  class  of 
bonds.  The  wisest  plan  is  for  the  investor  to  select  an  invest- 
ment banking  institution  of  conservative  character  and  be  guided 
by  its  judgment. 


Requirements  of  Safety 


When  a  successful  investor  wishes  to  avoid  risk  he  has  in 
mind  three  important  requisites  of  any  investment  he  may 
choose : 

First:     Security,  or  safety  of  the  principal  invested. 

Second:  Convertibility  into  cash  in  case  a  change  of 
investment  be  desired,  or  ready  money  needed. 

Third  :  As  high  a  rate  of  interest  as  can  be  obtained  with- 
out sacrificing  either  steadiness  of  income  or  safety  of  principal. 

When  one  buys  bonds  from  a  banking  house  which  has, 
through  wide  experience  and  trained  knowledge,  made  a  satis- 
factory and  rigid  examination  of  the  property  securing  the  bonds, 
he  is  obtaining  these  requisites  in  high  degree.     For  example: 

Safety:  Special  precautions  are  taken  by  the  Harris 
Organization  at  the  time  the  bonds  are  issued  to  see  that  its  own 


[  21  ] 


Harris      T  r  u  s  t     and     Savings      Bank 


money  is  safeguarded,  so  that  when  the  bonds,  in  turn,  are  sold 
to  customers  the  principal  of  the  investment  and  the  interest 
thereon  shall  be  safe  beyond  any  reasonable  doubt  and  be 
paid  promptly  when  due.  To  indicate  more  particularly  the 
general  safety  of  carefully  selected  bonds,  the  United  States  gov- 
ernment accepts  many  different  issues  as  security  for  deposits  of 
government  funds  and  postal  savings  bank  funds.  A  large 
portion  of  the  assets  of  national,  state,  savings  and  private 
banks  is  now  invested  in  bonds.  Bonds  to  the  value  of  hundreds 
of  millions  of  dollars  are  now  held  for  investment  by  the  prin- 
cipal insurance  companies  of  the  world.  Furthermore,  bonds 
not  only  are  regarded  as  the  most  satisfactory  form  of  safe  in- 
vestment for  the  wealthiest  individuals,  but  are  also  extensively 
used  for  safeguarding  the  carefully  accumulated  savings  of 
people  of  small   means. 

Marketability:  One  of  the  greatest  advantages  of  bonds 
as  safe  investments  is  the  ease  with  which,  under  all  ordinary 
conditions,  they  may  be  quickly  converted  into  cash.  It  is 
possible  to  borrow  money  on  a  bond  bought  of  the  Harris  Organi- 
zation from  practically  any  of  the  banks  of  the  country,  because 
the  bond  is  so  prepared  that  it  is  readily  recognized  and  may  be 
used  as  security  for  a  loan.  Again,  it  is  an  important  advan- 
tage for  the  investor,  if  he  so  desires,  to  be  able  to  sell  his  bonds 
promptly  for  cash  at  current  market  prices.  Serving  such  a 
large  list  of  investors  as  this  institution  does,  it  has  such  a  con- 
stant demand  for  the  kind  of  bonds  it  can  recommend  that  the 
investor  has  a  broad  market  in  which  to  dispose  of  his  bonds 
under  all  ordinary  conditions. 

Steady  Income:  Finally,  the  income  derived  from  bonds 
does  not  fluctuate,  can  be  counted  upon  as  a  definite  sum  and  is 
paid  at  regular  intervals. 


[  22  ] 


Why     Bonds    are     Safe     Investments 


Choosing  Safe  Investments 

When  it  comes  to  the  final  matter  of  the  choice  of  any  par- 
ticular bond  for  a  safe  investment,  the  investor  realizes  there  are 
numerous  technical  points  which  must  be  properly  understood 
and  investigatedby  experts  so  that  the  safety  of  the  bond  under 
consideration  is  assured.  Even  if  he  is  a  man  of  affairs,  well 
versed  in  such  matters,  he  probably  has  neither  the  time  nor  the 
inclination  to  examine  all  the  minute  details  of  the  bond  issue. 
The  one  real  essential  in  selecting  bonds  is  the  recommendation 
of  a  responsible  and  conservative  banking  house  of  large  expe- 
rience and  trained  judgment,  having  a  definite  system  of  safe- 
guards for  investors  from  the  day  their  money  is  invested  until 
the  final  payment  of  interest  and  principal. 

History  of  the  Harris  Organization 

The  Harris  bond  and  banking  organization,  consisting  of 
the  Harris  Trust  &  Savings  Bank  of  Chicago;  Harris,  Forbes  & 
Company  of  New  York;  Harris,  Forbes  &  Company,  Inc.,  Bos- 
ton, and  the  Harris  Safe  Deposit  Company  of  Chicago,  whose 
combined  resources  on  January  1,  1920,  were  approximately 
375,000,000,  was  founded  in  1882  by  Norman  Wait  Harris.  Mr. 
Harris  had  been  secretary  and  manager  of  the  Union  Central 
Life  Insurance  Company,  and  in  purchasing  investments  for 
that  company  had  learned  that  the  old-fashioned  bond  brokers 
did  not  always  obtain  complete  knowledge  of  the  securities 
which  they  offered  for  sale — the  reason  being  that  the  brokers' 
usual  commissions  were  not  sufficient  to  justify  all  of  the  ex- 
penses necessary  to  investigate  fully  the  details  of  a  security. 
He  had  also  come  to  the  conclusion  that  municipal  bonds  were 
among  the  soundest  investments  that  anyone  could  obtain.  So 
in  founding  the  house  of  N.  W.  Harris  &  Company  in  Chicago 
in  1882  he  decided  to  specialize  in  municipal  bonds  and  not  to  sell 
any  bonds  on  commission  but  to  buy  them  outright. 


\s 


[    23    ] 


N.  W.  HARRIS 
Founder  of  the  Harris  Organization 


[    24    ] 


Why     Bonds     are     Safe     Investments 


Mr.  Harris  also  decided,  as  a  basis  of  his  business  policy, 
to  make  a  thorough  examination  of  the  security  back  of  every 
bond,  its  legality,  the  value  of  the  taxable  property  of  the  issuing 
Municipality,  etc.  Later,  when  Mr.  Harris  and  his  associates 
foresaw  the  large  development  in  Railroad,  Public  Service  and 
other  sound  and  well  managed  corporations  together  with  the 
increasing  stability  of  their  securities,  the  scope  of  the  business 
was  enlarged  to  include  bonds  of  this  character.  Here  again 
was  laid  down  the  policy  of  thoroughly  examining  the  security 
back  of  each  issue,  including  not  only  the  relation  of  the  physical 
value  of  the  property  and  the  amount  of  bonds  outstanding,  but 
also  the  character  of  the  corporation's  management  and  its 
future  prospects.  For  this  work  only  disinterested  experts 
of  the  highest  character  and  ability  are  employed. 

The  policy  of  recommending  only  bonds  which  have  been 
thoroughly  investigated  has  been  maintained  through  the  entire 
life  of  the  Harris  Organization.  As  a  natural  consequence  this 
organization  has  declined  to  handle,  after  investigation,  many 
securities  which  have  since  proved  good,  although  at  the  time 
of  investigation  they  seemed  to  be  insufficiently  safeguarded. 
The  Harris  Organization  prefers  to  make  its  mistakes  on  the 
side  of  declining  securities  which  turn  out  to  be  properly  safe- 
guarded rather  than  of  purchasing  those  which  may  turn  out  to 
be  insecure. 

The  success  of  this  policy  is  evidenced  by  the  fact  that 
during  its  thirty-eight  years  of  existence  the  Harris  Organiza- 
tion has  served  over  5,500  banks,  bankers  and  trust  companies 
in  connection  with  their  bond  investments.  In  other  words,  it 
has  acted  in  the  capacity  of  special  expert  in  choosing  bonds  for 
men  already  financial  experts  themselves.  In  this  period  the 
Harris  Organization  has  purchased  with  its  own  funds  more 
than  three  billion,  five  hundred  million  dollars  (33,500,000,000) 
worth  of  bonds  and  notes  which  have  proved  safe  investments 
for  its  customers. 


u 


[    25    ] 


ALBERT  W.  HARRIS 
President  Harris  Trust  &  Savings  Bank 


[    26    ] 


Why     Bonds     are     Safe     Investments 


Mr.  Albert  W.  Harris,  the  present  head  of  the  Harris  Trust 
&  Savings  Bank,  not  only  has  followed  the  general  policies  laid 
down  by  his  father,  but  during  his  active  connection  with  the 
institution  of  over  a  quarter  of  a  century  has  had  a  large  share 
in  determining  those  policies.  Mr.  Harris  entered  the  business 
in  1888,  six  years  after  the  founding  of  N.  W.  Harris  &  Company. 
In  1896  he  was  made  a  member  of  the  firm,  and  when  the 
Harris  Trust  &  Savings  Bank  was  organized  in  1907,  was  elected 
Vice  President.  Six  years  later  he  was  elected  President.  All 
other  executive  officers  have  been  connected  with  the  institu- 
tion for  twenty  or  more  years. 

Harris,  Forbes  &  Company,  New  York  and  Boston  (for- 
merly N.  W.  Harris  &  Co.),  handle  the  bond  business  in  the 
eastern  territory.  There  is  no  direct  financial  connection  be- 
tween the  Harris  Trust  &  Savings  Bank  and  Harris,  Forbes  & 
Company.  The  two  houses,  however,  sell  bonds  from  a  com- 
mon list  and  have  the  benefit  of  the  combined  experience  of  the 
executives  of  both  organizations.  Mr.  Allen  B.  Forbes,  Presi- 
dent of  Harris,  Forbes  &  Company,  was  connected  for  many 
years  with  the  Chicago  office  of  N.  W.  Harris  &  Co. 

The  present  management  of  the  Harris  Organization  has 
followed  the  policies  laid  down  by  the  founder  of  the  business, 
and  it  is  gratifying  to  note  that  the  bond  sales  for  the  year 
ended  June  30,  1920,  were  by  far  the  largest  in  the  history  of  the 
organization — over  three  times  what  they  were  ten  years  ago. 

The  Harris  Organization  is  glad  at  any  time  to  place  its 
experience  and  facilities  at  the  disposal  of  any  prospective  in- 
vestor. This  will  put  the  investor  under  no  obligation  whatever, 
and  the  organization  is  just  as  glad  to  talk  over  an  investment  of 
a  few  hundred  dollars  as  one  of  many  thousands. 


[  27   ] 


The  Harris  Organization 

BOND  DEPARTMENT 

Harris  Trust  &  Savings  Bank 

Organized    aa    N.    W .    Harris    4    Co.    1882.  Incorporated    1907 

HARRIS  TRUST  BUILDING,  CHICAGO 


Harris ',  Forbes  &  Co. 

Pine    Street,    Corner  William 
NEW  YORK 


Harris,  Forbes  &  Co. 

Incorporated 

35  Federal  Street 
BOSTON 


Harris,  Forbes  &  Co. 

27  Austin  Friars,  E.  C. 
LONDON 


Representatives  of  Bond  Department  of 
Harris  Trust  &  Savings  Bank,  Chicago 


St.  Louis,  Missouri 

504  La  Salle  Building 

Minneapolis,  Minnesota 

801  First  National  Soo  Line  Building 

Milwaukee,  Wisconsin 

700-702  First  National  Bank  Building 

Louisville,  Kentucky 

34  U.  S.  Trust  Building 

San  Francisco,  California 
504  Insurance  Exchange 


Detroit,  Michigan 

38  Congress  Street,  West 
Penobscot  Building 

St.  Paul,  Minnesota 

400  Guardian  Life  Building 

Kansas  City,  Missouri 

1006  Scarrit  Building 

Los  Angeles,  California 

1029  Van  Nuys  Building 


Correspondent  Offices  of  Harris,  Forbes  &  Co,,  New  York 


Philadelphia,  Pennsylvania 
Widener  Building 

Cleveland,  Ohio 

Union  Commerce  Bank  Building 

Cincinnati,  Ohio 

2405  Union  Central  Building 

Rochester,  New  York 
Wilder  Building 

Albany,  New  York 

13  North  Pearl  Street 

Harrisburg,  Pennsylvania 
Kunkel  Building 

Hartford,  Connecticut 
36  Pearl  Street 


Pittsburg,  Pennsylvania 

Commonwealth  Building 

Buffalo,  New  York 
Ellicott  Square 

Baltimore,  Maryland 

211  East  Redwood  Street 

Syracuse,  New  York 

White  Memorial  Building 

Troy,  New  York 
11  State  Street 

Wilkes-Barre,  Pennsylvania 

Second  National  Bank  Building 

Washington,  District  of  Columbia 
603  Hibbs  Building 


Correspondent  Offices  of  Harris,  Forbes  &  Co., Inc.,  Boston 


Springfield,  Massachusetts 

Third  National  Bank  Building 


Toronto,  Canada 

King  and  Yonge  Streets 
C.  P.  R.  Building 


Montreal,  Canada 

21  St.  John  Street 


[    28    ] 


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